Tag: libra

Facebook Libra Is Realizing The Difficulty Of Regulatory Compliance

Facebook’s Libra is not looking good. Paypal, Mastercard, Visa and even E-Bay have pulled out of the Libra Association. This comes after the hurdles Facebook needs to overcome in order to meet regulatory compliance. This tells us just how difficult it is to build blockchain-based solutions that offer cryptocurrency as payments. It seems easy on paper to draft a proposal to gather some of the world’s leading companies to form a system for digital and cryptographically secure payments.

The following have been some of the criticisms thrown at Facebook from members of the US Senate (Senators Sherrod Schatz and Brian Brown) in a letter sent to CEOs of Visa, Mastercard and Stripe.

“We are concerned because key questions remain unanswered about the risks the project poses to consumers, regulated financial institutions, and the global financial system. We urge you to carefully consider how your companies will manage these risks before proceeding.”

The senators continue with this warning:

“Facebook is currently struggling to tackle massive issues, such as privacy violations, disinformation, election interference, discrimination, and fraud, and it has not demonstrated an ability to bring those failures under control. You should be concerned that any weaknesses in Facebook’s risk management systems will become weaknesses in your systems that you may not be able to effectively mitigate.

All this seems to have influenced the decisions of Libra Association members from dropping out of the project. Facebook is not exactly trustworthy when it comes to data privacy and security after revelations of their involvement with Cambridge Analytica and selling user data to third party without full consent. This makes the situation even more difficult with so much opposition from within the US government.

Libra aims to serve the unbanked and provide a fast and reliable way to make electronic payments using Facebook’s ecosystem. This is actually a major undertaking because of its potential to open up the cryptocurrency market to mass adoption. What is at stake here are Facebook’s 2+ billion users along with its social media platform Instagram and messaging application WhatsApp. Those who joined the Libra Association were viewing this as a major business opportunity to tap the market which this creates with Facebook’s users. Users would use the Libra token which they can access from the Calibra digital wallet to make payments, using WhatsApp.

The opposition seems to stem from the impact this would have not just on the US economic and financial system, but the world as well. This is because other countries also do not have a favorable look on Libra. In essence, Facebook would become a bank that would not be regulated by jurisdiction like the US SEC if it were allowed to operate. That can also threaten major banks around the world who could lose their customers to Facebook. With the ease of payments and money transfers, Facebook could definitely facilitate the unbanked all over the world. All they will need is their smartphone or computer to open Facebook and they have access to their digital money.

That would be unfair to other financial institutions, who are regulated and follow jurisdiction compliance. Why should Libra have no regulation when it is doing the same type of business as banks and financial service companies. What Facebook probably didn’t realize is the reason cryptocurrency are better off decentralized without any central authority. Bitcoin has been around for more than 10 years now because it has no owner or actual structural organization. It is truly decentralized in its governance. Despite being associated with Satoshi Nakamoto, no one can come after him because he remains anonymous. Perhaps Facebook is too late in realizing this is how you build a cryptocurrency.

The cryptocurrency community is also not that favorable of Libra, though some are open minded to the idea. Those who look in favor like the idea because it could open up the cryptosphere to more people. Libra would be the on-ramp to other cryptocurrency so it is a gateway so to speak. The more die hard cryptocurrency supporters don’t even consider Libra as a true cryptocurrency running on a real blockchain. It is basically just another form of electronic cash pegged to fiat that uses a digital ledger technology (DLT) that is highly centralized. The purpose of a true blockchain with a cryptocurrency is to be a trustless and permissionless decentralized system.

The odds seem stacked up against Facebook and their Libra Association. The good thing about this is that Facebook is realizing the potential of cryptocurrency and blockchain technology. They must meet regulatory compliance in order to proceed. The Libra Association is still intact, but they will need Facebook to meet compliance in order to get approval. The stakes are high, and there is big money to be made behind this. What is clear here is that the US SEC is making it clear that in order to play you have to follow the rules. It is now up to Facebook if they can meet those requirements.

Facebook, Ready To Become A Global Bank?

What advantage do social media giants have to offering financial services?

A large user base. Facebook is set to provide electronic payment services using their own digital currency called the Libra coin. This story was huge when it first came out because of the hype around it as a cryptocurrency that would compete against Bitcoin and Ethereum. Perhaps that is not quite correct. The Libra coin is being offered as a token that provides ways for users on Facebook’s platform to make payments to each other. The tokens are provided with the Calibra wallet and a network validates transactions via a group known as the Libra Association.

Facebook’s cryptocurrency is not using an actual blockchain, but more a digital ledger. While it also uses cryptography to secure transactions and make them immutable and provide transparency, the set number of validators on the network make it more permissioned and centralized than a public blockchain. That is counter to the ideology behind cryptocurrency which are supposed to be permissionless and decentralized. Facebook will not be the sole validator on the network though, that is because it will be the duty of the Libra Association.

The Libra token is also not exactly going to be a competitor against Bitcoin. Libra’s value will not be based on market speculation or demand, but will be pegged to fiat currency. It is not exactly the type of digital asset to acquire as a store of value, unless the purpose of the token changes. Otherwise it is just like another version of an electronic payment system that is already quite common. Pegging it into fiat removes the volatility that is typical of cryptocurrency. No matter how many Libra coins you have, its value will remain the same as the amount of fiat you exchanged it for. The use of the Libra token for payments is to provide easier ways to pay with less friction and for accountability purposes.

The list of Libra alliance members is what is impressive. The idea that Facebook was able to unite companies like PayPal, Uber, Lyft, Visa and Mastercard gives the notion that this must really be on to something. That is because it has such huge potential, it has already attracted scrutiny from mainstream finance and regulators. However, it is not exactly a good thing because rather than approve it, critics want to either stop the whole thing from happening or regulate it with the full extent of the law.

What we have to realize is that Facebook has over 2+ billion users. The impact such undertaking has can influence people’s lives. That means that billions of users will be able to use Facebook to not only make payments, but as an on ramp to trading cryptocurrency as well. That can be good news for Bitcoin and Ethereum holders. Rather than compete, it can foster cryptocurrency growth. Facebook wants to reach out to the greater part of the population that is unbanked. Now that is a significantly large proportion of the world’s population. With more people having access to the Internet through their smartphones (4G technology), the impact this can have is really huge.

For regulators, the concern is Facebook’s reputation. Since the data privacy issues and Facebook’s appearance before the Senate, why would anyone trust Facebook? Other concerns include whether Facebook will censor those on their platform from using Libra. The overall power that Facebook will have in this field makes it hard for anyone else to compete against because of how large the user base is. Facebook is an ecosystem that includes Instagram, WhatsApp and Messenger. It will become so easy and convenient to use these apps to make payments, it is a great business plan.

For banks the biggest concern here is Facebook as a competitor. Libra coins can be bought using the Libra Association’s payment processors. It does not require banks, and this raises more scrutiny. Does this mean “Facebook will become their own bank?”, because they can very well do that. If people and businesses can start taking out loans from the Facebook, that will disrupt the banking industry. The amount of fiat reserves that Facebook and their Libra Association will hold from selling the coins will be held as not for profit. However, they can use the funds to continue to develop the Libra ecosystem and it will still benefit the members of the alliance and Facebook. Despite being not for profit, they still make money from accrued interest and the amount of money is huge. This is actually from a second token called the Libra Investment Token, and this is the financial reward for members of the Libra Association. Just like any cryptocurrency, there is an incentivized reward system for those who participate in its consensus.

Without further regulatory clarity and the amount of requirements, Facebook will have a mountain to climb until they get Libra to the public. Since the Libra Association has registered in Switzerland, they will also need to meet compliance with the authorities there. In the US, it will have to meet both federal and then state regulation before it can be approved. Other countries like China, may have a conflict of interest with Libra and may not ever see its use there.

What Libra coin can also provide is an on-ramp to on-board more people to an electronic payment system. Depending on how you look at it, the system can also be a gateway to cryptocurrency. Thus it will not directly compete with cryptocurrency like Bitcoin, but can actually make it easier for people to buy them. This is because Libra can be listed on digital exchanges where they have a pairing to other cryptocurrency. While Libra can be used for payments, they can also be traded for other cryptocurrency on digital exchanges.

A global bank will have plenty of power, but also require more responsibility. Facebook has already violated trust among its users by selling their data to third party. There are now also issues with privacy after Facebook admitted that it listens in to conversations in order to improve the service. Will consumers also be comfortable knowing that all their transactions are tracked on digital ledger that is controlled by a sort of oligarchy i.e. The Libra Association. The problem is that there is so much lack of transparency, users would not have been aware of what is happening. The Libra Association claims they will move to a more permissionless and decentralized system by moving to the PoS (Proof-of-State) consensus. They also want to guarantee that there is transparency and immutability like in any other blockchain. Libra may be good for users in general, but earning trust is the issue. Whether or not Facebook is up to the task remains to be seen.